Vestas Warns of Loss in Midst of Order Surge

November 28, 2005 by Jeff Shepard

Vestas Wind Systems A/S (Randers, Denmark), the world's biggest wind turbine maker, shocked investors on Thursday by warning of a full-year 2005 loss due mainly to a component shortage that is preventing it from filling a surge in orders amid record oil prices. Shares in Vestas Wind Systems dived almost 20 percent as the company cut its operating profit margin to around minus 3 percent, from the previous forecast of a margin on earnings before interest and tax (EBIT) of plus 4 percent.

"This (the difference between the new and previous forecasts) is equivalent to 270 million euros ($318.1 million)," Vestas Chief Executive Ditlev Engel told a conference call, describing the downgrade as "embarrassing".

While Vestas sees full-year sales at 3.4 billion euros -- the high end of a previous forecast of 3.2 billion to 3.4 billion -- it sees a loss of around 102 million ($120 million). Vestas shares closed down 19.67 percent at 109.25 Danish crowns, around its levels last summer.

"This is an industry phenomenon. The strong market growth this year has created an unusual demand for components such as gear boxes and forged and cast steel components," said independent industry analyst Per Krogsgaard from BMT Consult.

Apart from the supply woes, Vestas said continued poor quality of components had also triggered substantial additional warranty provisions.

And finally Vestas had to prioritize completion of eight low-margin U.S. projects, accounting for around 25 percent of total 2005 sales, due the terms and conditions of the contracts.

"Had the margin of these projects been on par with the already low average earnings of non-U.S. orders, we would have made an additional 135 million euros," Engel said.

He said Vestas had turned down orders worth 1 billion euros in recent months due to unacceptable terms and conditions.

Vestas said prospects for the global wind power market were extremely positive and that its order backlog was very satisfactory, citing the high oil prices. The global market is seen growing by around 15 percent annually in the coming years.

"I don't care how much the industry grows. If there is no cash flow, there is no money for investors," said JP Morgan analyst Andreas Willi, adding he would maintain his 100 crown price target for Vestas stock.

Vestas said it would focus on profitability at the expense of market share in 2006.

For 2006, the company expects a positive EBIT margin in the range of 4 to 7 percent on sales of 3.6 billion to 3.8 billion euros. It said that the width of the estimated EBIT range reflected the operational risks from component shortages and other potential capacity constraints.

"The 2006 sales guidance is positive, but the uncertainty about the profit margin is negative," Sydbank analyst Jacob Pedersen said.

Vestas, which has a global market share of around 35 percent, repeated its 2008 target of a minimum EBIT margin of 10 percent. The company also said it had won an order for 121 units of its V82 1.65 megawatt turbines for a Canadian wind farm. Shipment and commissioning is set for the end of 2006. Vestas said it had decided to put on hold development of new technology, including the production of its V120 4.5 megawatt turbines.